"your expenses as a percentage of your gross profit — "not a percentage of your sales. You pay your bills with gross profit — not with revenue."

[This is a duplicate of the question at]

Since some new business owners get excited about revenue, instead of gross profit, it is always wise to show the difference.

Let us consider as an example, that your business makes $10,000 (revenue) in revenue in one month, and has a cost of goods (or services rendered) of $7,000. This means that you have to pay someone (e.g. a vendor) $7,000 to make $10,000.

Then, you are faced with general expenses for the month that amount to $2,000 (utilities, etc.).

The excerpts that you quoted from the article mean that you should NOT think that you are spending $2,000 from the $10,000 (revenue), but that you are spending $2,000 from the $3,000 (gross profit: $10,000 - $7,000).

As you can imagine, you will be much more cautious when you realize that you are spending 66% of your gross profit on expenses, and not simply 20% of your revenue.

While this is certainly common sense, the reason for his pointing it out is that sometimes people do not keep it in mind.

Answered 6 years ago

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